Intel’s Hangover Continues In 2013: Buy or Sell?

Despite being one of the most influential companies in the entire tech landscape, the last five years have been a rocky ride for Intel Corporation ($INTC).

Even though the company still occupies a dominant competitive position in the PC sector, the hits just keep on coming for the Santa Clara, Calif.-based company.

The numbers don’t lie either. In the last year alone, shares of Intel are down 19.75% compared to a 12.78% gain for the NASDAQ.

So what exactly is weighing on shares of Chipzilla these days?

CEO Departure: Several weeks ago, Intel CEO Paul Otellini surprised investors by announcing his decision to retire and step down in May 2013. He took on the CEO role during 2005 and steered the company through many bleak moments, including the largest series of layoffs in company history.

Mobile Failures: Despite investing 10+ years and billions of dollars into mobile CPU’s, the company has still yet to hit paydirt in this hot market. Inte has yet to earn any major design wins in smartphones and/or tablets. Samsung, Apple ($AAPL), Qualcomm ($QCOM), and other competitors continue to dominate this landscape with seemingly no end in sight.

Earnings Miss: Even worse, Intel’s Q4 financial results were below expectations and sent investors heading to the exits, as earnings dropped 24% year-over-year. Shares of Intel fell more than 5% following the gloomy report.

Eroding Margins: Gross margin, a long-time bright spot financial metric for Intel, dropped by a mind-boggling 6.5% to 58%. It’s not like the revenue side is much better either – for the full year, Intel’s revenues actually decreased 1.2% to $53.3B.

Higher Capital Expenditures: Despite sliding revenues and margins, Intel plans to spend $13 billion on new capital during 2013. When companies are growing profits at a fast-clip and margins are expanding, investing in new capital makes sense… but it’s very risky to expand cap-ex so quickly when earnings and revenue are declining.

All of the factors above definitely point to a company that is going through a rocky transition period, but the cap-ex trends are perhaps the most disconcerting.

Intel maintains the largest network of semiconductor fabrication plants in the world and CEO Paul Otellini recently admitted that Intel is currently running their fabs at less than half their capacity.

So let me get this straight – Intel is using less than 50% of their existing capacity, they aren’t opening up their factories as a foundry to external customers, revenues and margins are slipping, yet they want to invest $13B in new factories during 2013?

That is quite a risky proposition.

My ideal investing approach is to invest in companies who are clicking on all cylinders, not companies who are going through dry spells.

Investing in companies who are going through rough transition periods is a scary proposition, but it’s even scarier if cap-ex is ramping up during the transition.

Completing a successful turnaround becomes much tougher when companies are spending billions of dollars on new capital in the face of decreasing revenues and sliding margins. Not to mention, there is always a huge depreciation hit that accompanies such large capital outlays, which weighs on margins.

While Intel has a strong competitive position and a solid balance sheet, what if the turnaround doesn’t materialize?

I recommend staying away from this tech-heavyweight for now – it’s just too risky.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Rob a.k.a. Techinsidr has been trading stocks and following the stock market since 1997. He formerly worked at Intel Corporation in a Financial Analyst role, responsible for overseeing an annual budget of $160M... More »

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